FX Update: GBP shrugs off Brexit stumble, key week for USD
Head of FX Strategy
Summary: After the weekend failed to produce a definitive Brexit outcome, we face a critical couple of days ahead that determine whether we are headed for a quick deal or yet another delay. After the weak close on Friday for the US dollar, USD bears will need to maintain a head of steam to underline the sense that the USD is turning lower.
The UK delivered indecision once again, its most bountiful export these days, as the weekend saw the vote on Boris Johnson’s Brexit deal avoided with an amendment passed to give lawmakers time to review the deal. The outcomes from here remain uncertain, but it is still theoretically possible that a vote takes place on Johnson’s deal as soon as today, which would then require special legislation to allow a speedy passage of the deal before October 31. Insiders are claiming that the votes for the deal are there, due to a sufficiently large number of Labour rebels from Leave districts ready to vote in favour, even if the DUP remains unsupportive. But if a vote is blocked from taking place, or if the “Letwin 2” amendment blocks the result of the vote, the risk is another delay and a snap election and even a possible second referendum if Labour gets its way. Either way the odds favour either passage now or passage before end of January, though the short term price action could be quite different under those two scenarios (upfront rally now assumed if Brexit deal passed right away). Whatever the outcome, the situation is fluid and the market (with GBPUSD trading well north of 1.2900 this morning) appears to be leaning in favour of a vote taking place and that vote being in favour of Boris Johnson’s deal – more thoughts in the GBP section below.
The US dollar ended last week on a low note, and we suggested in Friday’s update and in today’s Market Call that one of the important drivers is the whether the US Fed is beginning to at least stay on the curve and possibly get ahead of it, and more importantly, whether the market trusts that the Fed is ready to provide the necessary liquidity and easing at every turn necessary to keep the market well supplied with dollars. The first hurdle has been cleared in many places on the charts, including EURUSD trading above the 1.1110 area that was introduced as a key chart point all the way back in the spring of this year. Elsewhere, EM currencies are generally strongly on the bid versus the big dollar and the commodity dollars have also cleared local resistance against the greenback. The knock-out blow is not yet in evidence, however, which starts in the case of EURUSD a bit higher, as we discuss in the chart below.
Today is Canada’s Federal election, with very tight polls indicating that this will be a very close call. The options market suggests no anticipation of the outcome either way, most likely because it doesn’t appear that Trudeau’s Liberals or the opposition Conservatives, led by Andrew Scheer, will gain a majority and thus whoever wins will have to operate as a minority government or in an awkward coalition.
Elsewhere this week, let’s keep an eye on the momentum in favour of impeaching Donald Trump, who is increasingly under siege on all fronts, with increasing signs that allies within his own party are reconsidering their formerly unalloyed support. Historic parallels have been drawn to Richard Nixon’s popularity during the Watergate scandal, where support for his presidency crumbled quickly once it reached a tipping point. Markets would likely not take kindly to a stronger risk of Trump being forced from office (House impeachment not a market mover, only becomes a market mover on widening signs that Republican senators are ready to abandon Trump in the Senate vote on removal from office, which requires two-thirds super-majority).
EURUSD has crossed a technical level of note in rallying above the 1.1110 area that was first tested way back in the spring of this year, and the next focus here is perhaps on the 61.8% retracement of the sell-off wave from the 1.1400 area to the sub-1.0900 lows and 200-day moving average, both just above 1.1200. But the firmest sign of a profound turn in the pair’s fortunes would be a full-pull rally into 1.1400. Stay tuned, but for now the momentum is with the bulls.
The G-10 rundown
USD – the US dollar is turning lower, a move encouraged by strong risk appetite on the sense, or hope, that the Fed is ready to provide the liquidity needed to avoid any reaggravation of USD shortage issues. The data calendar is light this week, but the news calendar may not be politically, also as Thursday will see a major policy speech from Vice President Pence on China.
EUR – the Euro rallying here, perhaps 25% supported by Brexit hopes and the rest down to the sense that the ECB has reached an absolute low here and that the only next policy step will be more FX-supportive fiscal stimulus.
JPY – the JPY not enjoying the ongoing weakness in bonds and strong risk sentiment, together with the sense that the BoJ is scratching around for more logs to throw onto the fire in bringing further easing at its policy meeting at the end of the meeting.
GBP – the market leaning rather hard on a Brexit deal getting done – earlier this morning I was thinking that an extension scenario means kneejerk “uncertainty”, but as sterling aggressively rallies this morning, I am wondering if a delay scenario could be even more GBP supportive as it could open up for a path to Remain or an even softer Brexit and that the worst possibly outcome is Boris’ deal or something even softer. We shall see soon enough.
CHF – Swiss franc surprisingly firm given euphoric sterling and weak bonds this morning. EURCHF having a hard time finding separation from 1.1000.
AUD – AUD enjoying the strong risk appetite and AUDUSD has cleared local resistance, though a bigger pivot level awaits just below 0.6900 and the 0.7000+ needed to really start turning the trend.
CAD – USDCAD has broken lower, but the bottled up range of the last many months extends all the way to just above the 1.3000 area, a level with significance well back into 2018.
NZD – yield spreads suggest AUDNZD should continue to find support, in the current area, but traders have to be frustrated with the lack of momentum for renewing the rally. We will likely need a catalyst to do so.
SEK – EURSEK dipping into the pivotal area below 10.80, but needs more enthusiasm in risk appetite, more EUR strength and more of a sense that the EU and Swedish economies have bottomed to really start pushing lower (SEK higher). The recent news that unemployment data is faulty could give the Riksbank pause this week in getting too pessimistic.
NOK – the krone trading to record lows. Many suggest seasonality is in part to blame as NOK tends to do poorly into year end, but weak oil – and importantly natural gas – prices are a driver as well. Norway’s export revenues from Natural Gas are beginning to take over those for oil.
Quarterly Outlook Q2 2022
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